The flawed prophets of profits
If we only knew what the future holds over the next year or so, imagine the money we could make for our clients. But beware of trying to predict the near-term future. Let’s look at the predictions of three financial prophets.
Will oil regain its footing or will the plunge resume? Will the U.S. slip into recession this year? Questions such as these and more were answered at the Inside ETFs conference early this year in a session titled Mark Yusko’s 10 Bold Predictions for 2016.
The audience of roughly 2,000 advisors listened intently as Yusko, the CEO of Morgan Creek Capital Management, confidently discussed his predictions. It made sense that they were hanging on every word since the program description said Yusko had an “impressive track record” and was one of last year’s highest-rated speakers. Anticipation was definitely in the air.
I interviewed Yusko shortly before his talk and told him I was less interested in his predictions and more in his impressive track record.
Yusko responded by saying it was the conference organizers who had written the program, but they were probably referring to both his predictions from the previous year and his Morgan Creek Global Equity Long/Short Fund besting the MSCI World index.
Later, he stated his record as No. 2 on the investment team at Notre Dame in 1993-1998 was significant enough to get him the job as CIO at the University of North Carolina, and from 1998 to 2004 he moved “impressively from the 84th percentile of endowments to the 5th percentile.”
As it happens, I already knew quite a bit about Mark Yusko’s career — particularly his years as the co-founder and CIO of the Endowment Fund, a $3 billion fund I helped two clients get out of before Yusko was removed in 2013 and redemptions were severely limited because of disappointing returns. Even more troubling were two tactical asset allocation funds Yusko managed with very poor performance, both badly lagging the Morningstar moderate target risk category. The Morgan Creek Tactical Asset Allocation Fund (MIGTX), for example, lost 14.57% in 2015 and 6.66% in 2016 through March 16, 2016.
Though Yusko declined my request to name which of the seven forecasts he claimed to get right in 2015, he did respond as to why a tactical asset allocation fund wouldn’t have the freedom to invest in whatever asset class his successful predictions would benefit from. Yusko stated, “Surprises are not equivalent to our macro view and how many actually occur in a given year is not an accurate predictor of the performance of any of our investment products.” He then stated “I have no affiliation with the Endowment Fund,” failing to address the performance while he was CIO.
The bottom line is that the track record might not have been so impressive over the past decade. Yet Yusko seemed exceedingly confident during his presentation.
DEATH OF THE DOW
If you think the last market plunge was bad, get ready for Dow 3,300, according to a recent email from economist Harry S. Dent Jr.’s firm. The email stated, “Given the uncanny accuracy of his track record, you’d be wise to take his latest warning seriously.” Dent, known for his demographic analysis of the aging of baby boomers, made predictions in early 2009 of Dow 3,800 in his book The Great Depression Ahead, and in earlier books, he predicted Dow 40,000.
Have bad predictions translated into good investments? Not so much. His Dent Demographics ETF (DENT) went extinct in only about three years. The fate was essentially the same as the AIM Dent Demographic Trends Fund (ADDAX) many years earlier. I once wrote about my dream of launching an ETF called INDENT, which would do the inverse of the DENT fund. It was a sarcastic piece, but perhaps investors could have made some real money if I had actually launched that fund.
To avoid accusations of cherry picking, I asked Dent’s publicist for any evidence that his forecasts had led to successful investing. No response was received.
Perhaps Jim Cramer of TV show Mad Money is the most famous of all investment prophets. But does fame translate into fortune for investors?
I was intrigued when in November 2012, Cramer came out with two stocks to “sell, sell, sell — immediately.” Having missed out on a hefty profit by failing to launch INDENT, I actually bought both Hewlett-Packard and Best Buy and pocketed 22% in 22 days. In fact those two stocks were the third- and fourth-best performers of the Wilshire Large Cap 750 over the next year.
But nobody gets a hit every time. What is his overall track record? According to CXO Advisory Group, Jim Cramer has been directionally correct 46.8% of the time and below average among a group of 68 financial prophets that averaged less accuracy than a coin flip. Needless to say, Jim Cramer objected to that work. So I sent an email to two senior executives at CNBC asking for any evidence to support his track record, yet again received no response.
TRAITS OF PROPHETS
I’ve studied stock investing gurus for a decade. I’m fascinated as to why even sophisticated advisors follow them. To better understand, here are some actions they exhibit that I’ve noticed.
Display absolute confidence. Gurus come across as very sure of themselves. One astute attendee of Yusko’s talk told me he lost count of the number of times he used words like definitely, certain and 100%.
Brag about winners. Gurus tout their winners and forget their losers. Cramer didn’t mention the sensational performance of the two stocks he advised selling immediately, nor did he respond to my request for a comment. Yusko mentioned his one successful hedge fund, but not his failed hedge fund or two underperforming tactical allocation funds. Dent doesn’t mention his 0-2 record on investment funds or his past predictions on the Dow.
Forecast the past.Gurus often explain what happened in the past as if it was obvious (hindsight bias) and implying they profited from the advice. This gives credibility to forecasts of the future.
Give numbers or dates but never both. We can’t exactly say that Dent was wrong in 2009 when he forecasted Dow 3,800. Investors who followed that guidance missed out on one of the greatest bull markets in history, but he didn’t give a date when the Dow would plunge. Yusko at least did go out on a limb and make predictions over the next year.
Tell followers they’re beating the market. Every guru seems to brag about his track record but gives no overall detail.
We all want to know the future and seemingly are so driven by this desire that we suspend common sense and even five minutes of due diligence before some of us bet our clients’ money into these forecasts.
In my view, prophets exhibiting the traits previously discussed are using tactics to get your emotional buy-in. But emotions are typically a very bad way to invest. The Internet makes simple due diligence easy, and skipping this step is likely to be at your client’s peril. If you find major costly forecasts or awful performance, ask yourself why the prophet didn’t mention the failure? Shouldn’t that break a bond of trust?
These prophets are far more likely to profit than your clients, so if you proceed, use extreme caution. Danger may lie ahead.